FinTech Comparative Guide

• Published date: 16 September 2020
• Subject Matter: Finance and Banking, Technology, Financial Services, Fin Tech
• Law Firm: Hogan Lovells
• Author: Ms Emily Reid

1 Legal and enforcement framework

1.1 In broad terms, which legislative and regulatory provisions govern the fintech space in your jurisdiction?

Fintechs are treated like other financial services firms. If they carry out activities that fall within the scope of one of the regulated activities under the Financial Services and Markets Act 2000 (FSMA), they will need to be authorised by the Financial Conduct Authority (FCA) or the Prudential Regulation Authority (PRA) (part of the Bank of England). Regulated activities are defined in the FSMA (Regulated Activities) Order 2001. This primary and secondary legislation is supplemented by the principles, rules and guidance in the PRA Rulebook and the FCA Handbook. Other key legislation includes the Consumer Rights Act 2015, the Data Protection Act 2018 and the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017. Depending on a fintech's areas of focus, some key EU measures include the second EU Payment Services Directive (2015/2366/EU), the EU Electronic Money Directive 2 (2009/110/EC), the recast EU Markets in Financial Instruments Directive (2014/65/EU), the EU Markets in Financial Instruments Regulation (600/2014) and the E-commerce Directive (2000/31/EC).

1.2 Do any special regimes apply to specific areas of the fintech space?

There is no special regime for fintech in the United Kingdom; fintech firms' activities are treated in the same way as those of other financial services firms.

1.3 Which bodies are responsible for enforcing the applicable laws and regulations? What powers do they have?

The PRA is the prudential regulator and the FCA is the conduct regulator for banks, insurers and the largest investment firms. The FCA is the sole regulator for other firms.

The PRA and FCA have a number of supervisory and enforcement powers. Both the PRA and the FCA have the power to make periodic inspection visits of firms. They also have various powers under FSMA, including to require a firm to provide specified information or documents or commission a report by a skilled person, to publish warning notices and to impose financial penalties. They can both impose specific requirements on firms - for example, to seek the regulator's consent before undertaking certain acts. There are also a number of offences under the FSMA, such as carrying on a regulated activity in the United Kingdom, or purporting to do so, without the relevant authorisation or exemption is a criminal offence.

The Payment Systems Regulator (PSR) has responsibility for the oversight of retail payment systems and is a subsidiary of the FCA. It is competition focused, with wide powers, including the power to amend agreements relating to access to payment systems and to require banks to enter into agreements with smaller institutions. It can investigate and impose fines or other sanctions.

1.4 What is the regulators' general approach to fintech?

The FCA is supportive of the fintech sector, recognising that innovation is key to achieving effective competition in the interest of consumers, which is one of the FCA's statutory objectives. For example, the FCA's Regulatory Sandbox, part of its Project Innovate, provides a safe space for fintech companies to test new products, services, business models and delivery mechanisms in a 'live' environment with real consumers for a limited period, without the time and cost of the full authorisation process or the risk of regulatory penalties. Eligibility criteria for the Regulatory Sandbox include a requirement that the product or service involve genuine innovation and direct or indirect consumer benefit. The tailored authorisation process is restricted to allow companies to test only the ideas agreed with the FCA.

On the payments front, one of the PSR's statutory objectives is the promotion of innovation in payment systems.

The PRA acknowledges that it must be ready to adapt its prudential regulatory approach to the risks, opportunities and changes in the structure of the financial system resulting from technological developments. More widely, the Bank of England looks to explore how fintech might support its mission to maintain monetary and financial stability. This includes understanding what fintech means for the safety and soundness of financial firms, and performance of its own operational and regulatory roles (eg, infrastructure requirements). The Bank of England's Fintech Accelerator includes a programme through which it works with businesses on fintech proofs of concept.

1.5 Are there any trade associations for the fintech sector?

Innovate Finance is the UK industry body for fintech, representing the UK's global fintech community. It provides a single point of access to promote enabling policy and regulation, talent development and business opportunity and investment capital. Members range from seed-stage start-ups to global financial institutions and professional services firms.

FinTech North focuses on the fintech community in the north of England. It provides a platform for sharing ideas, challenges and best practice, for showcasing innovative start-ups and scale-ups, and for facilitating connections and collaborations.

FinTech Scotland brings together entrepreneurs, the established financial sector, the public sector, accelerators, investors, consumer groups, technology and service firms, universities and skills agencies.

The FinTech National Network brings together FinTech North, Innovate Finance and FinTech Scotland to offer collaboration opportunities throughout the United Kingdom. The network encourages collaboration between UK fintech hubs to raise their collective profile on the global stage and address shared challenges across topics such as skills and talent, capital and investment and diversity.

2 Fintech market

2.1 Which sub-sectors of the fintech industry have become most embedded in your jurisdiction?

Four of the most embedded subsectors of the fintech industry are:

• payments-related platforms (eg, PayPal and PaySafe), with $106.49 million of UK venture capital investment in 2018;
• challenger banks, such as Marcus, Monzo and Revolut, with the biggest share of venture capital investment at $461.43 million in 2018;
• personal finance and wealth management, such as Nutmeg, with $333.61 million of venture capital investment in 2018; and
• alternative lending and peer-to-peer lending, such as Funding Circle, with $306.64 million of venture capital investment in 2018.

All of the above information has been taken from Innovate Finance, "2018 FinTech VC Investment Landscape", January 2019.

2.2 What products and services are offered?

Within a specific sub-sector, it is typical for a start-up to focus on one product or service that it can deliver more effectively or with a better customer experience, or that fills a gap in the market. For example, new payment acceptance services have enabled small and medium-sized enterprises (historically considered too unprofitable for the major acquirers) to accept card payments; online lenders working with employers are enabling credit to be made available at better rates to consumers who have historically found it difficult to borrow; and roboadvice is broadening access to the mass market, not just to the affluent. Once a gateway product has been established, other related products may follow, offered either directly or in cooperation with financial institution partners.

2.3 How are fintech players generally structured?

Almost all new start-ups are limited companies, given the need to bring in equity investors.

2.4 How are they generally financed?

Most fintechs are financed by venture capital or private equity investment. According to the UK FinTech Paper, there was $3.3 billion of venture capital, private equity and corporate venture capital investments into UK fintech in 2018. As for the geographical source of funds, the United Kingdom remains a 'competitive' investment destination, with 50% of investment from overseas, largely from North America (25%) and Europe (18%).

In terms of sectors, the UK FinTech Paper stated that challenger banks led the way with $461 million of venture capital investment in 2018. This was mostly Revolut's Series C funding and Monzo's $110 million Series E.

There were also high levels of venture capital investment in several sub-sectors, showing a sharp increase from 2017. These included personal finance and wealth management ($333.6 million), alternative lending and finance ($306.6 million), blockchain and digital currencies ($174.7 million), insurtech ($103.1 million) and payments ($102.5 million).

There has also been increased private equity investment in UK fintech over the last few years, according to Innovate Finance (Innovate Finance, "2018 FinTech VC Investment Landscape", January 2019), with a twelvefold increase in investment and a fivefold increase in deal volume by private equity-led investors.

Crowdfunding is also a popular way for start-ups to get backing from the public through a platform. Revolut and Monzo have both had successful crowdfunding campaigns.

2.5 How are they positioned within the broader financial services landscape?

Many new entrants in corporate, investment and retail banking are embracing 'coopetition', rather than competition. This involves partnering with traditional banks, rather than directly competing. According to McKinsey (McKinsey and Company, "FinTechnicolor: the New Picture in Finance", February 2016), start-ups rely on established institutions to fulfil loans or provide the payments backbone for credit-card or foreign-exchange transactions. These start-ups have highly automated, scalable, software-based services and no physical distribution expenses (eg, branch networks), giving them a significant cost advantage.

Banks are having to adapt to the new landscape with these disruptive and innovative new entrants. According to the UK FinTech Paper, "While just a few years ago it was easier to dismiss new...